It’s Bill Ackman’s Game, and Herbalife’s the Ball

By Sam Mamudi

This chart says it all:

Apparently this is what happens to your stock when a famous hedge fund manager decides to make a public case for why he’s shorting 20 million of your shares.

Herbalife‘s (HLF) shares are down another 19% today, and now down about 35% since Tuesday’s close. On Wednesday, the news broke that Pershing Square Capital Management’s Bill Ackman was shorting Herbalife stock. Earlier today, Herbalife said it will respond to Ackman’s very thorough accusations against the company at an investor day on Jan. 7.

I don’t know who’s right, Ackman or Herbalife — and it’s worth noting that while the market is sending the shares down sell-side analysts have been lining up to reaffirm their Buy ratings for the stock. But the effects one man’s words can have on a company are instructive, and perhaps sobering.

But just because Ackman was right about MBIA, it doesn’t mean he’s right about Herbalife. After all, Einhorn sent shares of Chipotle Mexican Grill (CMG) tumbling in early October when he revealed he was shorting the fast food chain. But while that helped send Chipotle shares down 25% in the following weeks, the stock has since bounced back and is up 22% from its closing low, though down about 8.5% from when Einhorn spoke.

So it’s understandable that the media is covering Ackman this week, and perhaps smart that investors seem to be heeding his advice. And Herbalife isn’t bulletproof — Einhorn himself raised questions about the company earlier this year, and it was down 17% on the year through Tuesday. But just because a fund manager has been right, and right in a spectacular way, doesn’t mean he’s infallible.

Given that he’s almost the entire short for Herbalife, Ackman’s clearly made a lot of money this week (though he’s pledged to donate any profits to charity); but surely we should also pause to consider that he took the short then used his fame and position in the media to talk down the stock in no uncertain terms.

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There are 15 comments

DECEMBER 21, 2012 3:50 P.M.

CJ wrote:

Criminals...

DECEMBER 21, 2012 4:23 P.M.

Dmitry wrote:

This is sort of sad but that's just the way the market works. On the one hand, public companies should not be subject to massive manipulation (check FMCN, for instance, back in Nov-Dec 2011, taken down by Muddy Waters, only to rally back and leave Joes and Janes holding the bag). On the other hand, a public company should realize that by the virtue of being public it is completely exposed: a price one pays for gaining equity and the funds for further growth. So, if a short raid befalls an unfortunate entity that firmly deems itself sound, it should take the event as an opportunity to initiate a buy back program and decrease its dilution, a very profitable strategy for the company in the longer term that can further reaffirm its "righteous" position.

/Dmitry

DECEMBER 21, 2012 5:39 P.M.

kguy wrote:

dude sam, poorly, not poorly, ridiculously poorly written article.

1. david einhorn was short on cmg on valuation and not on the very business foundation. ackman is short on the very foundation of the company.

2. if stock is so cheap, why can't the smarty pants market buy buy and buy it. oh, it is what it is doing from 72, to 55, to 52, to 45, to 35, to 32 and today 27!!

3. analysts who cover this stock should be put in the wall of shame. they still have 72 bucks price. shame on you guys.

4. ackman will cover to 0. that's what he told. that is pretty big statement. david einhorn on cmg will cover say at 150 on valuation!!

5. i am a fitness freak NOT living where ackman lives and i have NEVER EVER heard of the 2 bn product of herbalife. NEVER EVER.

6. last but not least, if the stock is so cheap, go and buy it and sell back in the face of ackman at $50 or $75 thereby causing him massive 500 to 1 bn dollar loss. go do it.

7. kudos to ackman on a brave position. capitalism/markets needs honest people and not anal-yst who damn hell does not know a shit.

8. personal threats, insults to ackman is de-meaning. if you dispute, fight his facts and not the person.

DECEMBER 21, 2012 5:49 P.M.

goodwill wrote:

I zone in on the COO purchase a few weeks back. Nothing like an insider putting his $$'s on the line. Ackman is a shrewd/reupted investor, but retail investors may want to be cautious piggy backing on Ackman's trade. When 90% of the float is concentrated in one hand, the scales are tilting for a short squeeze at some point. Also, since management was very vocal defending the company, a management led buy out cannot be ruled out - assuming they were serious about the responses/defenses to the short presentation.

DECEMBER 21, 2012 6:58 P.M.

Claire wrote:

Many analysts thee called t a week argument Ackman did not explain how a “pyramid scheme” lasts 32 years without an army of disabused and dispossessed latecomers to the party clamoring for refunds. also he did not account for the fact that net cash from operations went from $271 million in 2007 to $509 million four years later. Perhaps he’ll note that sales are set to rise another 17% this year, after a 26% leap in 2011. Or that Herbalife allows distributors to return unsold product for up to a year, and that returns have accounted for less than 0.5% of sales in recent years.

I Agree and many others:
" what many believe to be a nefarious hedge fund manager cruelly attempting to manipulate the market and profit by stealing main-street's income and shorting a good company "

DECEMBER 21, 2012 8:52 P.M.

S wrote:

"While the market is sending the shares down sell-side analysts have been lining up to reaffirm their Buy ratings for the stock." As if those Buy ratings mean anything at all. This is why journalists stay in journalism and could never make it in investing.
"But surely we should also pause to consider that he took the short then used his fame and position in the media to talk down the stock in no uncertain terms." This is the same style of thinking lazy reporters everywhere use whenever someone takes a short position and makes a big issue of it. Note to this reporter: people are self-interested. Ackman is and so is, shock, the people who run Herbalife.
"I don’t know who’s right, Ackman or Herbalife " Instead of twiddling your thumbs and waiting for somebody that looks or sounds like they know what they're talking about to tell you what to think, maybe you should actually do the analysis yourself. Otherwise, what's the point of this article?

DECEMBER 22, 2012 6:07 A.M.

Lazy Man and Money wrote:

If Herbalife wanted to avoid this issue all they had to do was change their distribution system away from one that the FTC often associates with pyramid schemes. They left themselves vulnerable and have no one else to blame.

It is telling when just about every financial journalists says, "I don't know who is right." Yet if Ackman, Einhorn, or anyone else came out and called Apple, McDonalds, or IBM a pyramid scheme, they'd get laughed at with people calling them crazy.

Ackman made a very detailed case and Herbalife hasn't even put up a high-level defense yet... not a good sign.

DECEMBER 22, 2012 6:13 A.M.

Lazy Man and Money wrote:

Clare,

Ackman did explain why the abused aren't clamoring for refunds. They simply can't get them because it gets backed out of their profit checks in the form of a clawback.

Herbalife has been going into new countries over the last 5-6 years and Ackman provided a nice set of charts explaining the pop-and-drop. It accounts for the rising sales. Problem is that they are running out of countries.

Keep in mind that Ackman doesn't profit from the trade. The money goes to charity. It's not market manipulation. It is straight-forward exposing fraud.

DECEMBER 22, 2012 9:08 A.M.

Emily wrote:

I am sure a few fancy power point slides with inaccurate, outdated information at one point saying the company does not retail sales how ridiculous will not stop 32 years of momentum & the trend of daily consumption or club model that was started in Mexico an old market which has continued to grow over 10 years and now has spreading world wide . 85% of Herbalife sales comes from outside USA and people in cities in India or in San Paulo. Brazil or Seoul, Korea don't care about Wall st or IT'S ANTICS and Mr Ackman $1 billion bet, sure he will make his fortune and give the money to charity yeah right he can it give it to Herbalife family foundation started in 1994 which is helping kids worldwide with over 100 homes for children in incredibly poor countrieshttp://www.herbalifefamilyfoundation.org/?nd=hffworldvideos

DECEMBER 22, 2012 9:24 A.M.

Graham wrote:

Claire I agree hopefully the company will use this opportunity & take company private and move on
to quote Jim Rohn an amazing much loved man who worked with Herbalife for 20 years
" All good will be attacked, and every garden will be invaded. All values must be defended.
Happy Holidays to all

'

DECEMBER 22, 2012 12:38 P.M.

Cheers to Ackman wrote:

Sam, have you read Mr. Ackman's detailed analysis(300+ slides)?? A 5th grader who went through the slide presentation would come to the conclusion that Herbalife is a 30+ ponzi scheme that TAKES ADVANTAGE of poor desperate people! Ackman is doing good and doing well. he should be lauded for bringing HLF to jusitice!

DECEMBER 22, 2012 3:01 P.M.

@ionbonds wrote:

This is the one and the same Ackman that made a huge long bet on JCP....that chart looks very similar to the HLF chart..

DECEMBER 22, 2012 6:46 P.M.

JD wrote:

Lazy man, you are an idiot

DECEMBER 23, 2012 1:15 A.M.

amy wrote:

There were so many flaws in Ackmans presentation, the slide on pg 87 is totally wrong. He doesn't understand how the incomes are generated. I'm a 20+ yr dist (Supervisor) with a strong base of repeat customers who order month after month after month, yr after yr after yr, steady clientele, who are not dist's. I haven't had a refund in years and my organization of approx 50 supervisors who also recruit very few new dists, most of them have steady custs as do I. Their inventory turns over month after month because people like the product. It's very sad this whole wall street thing. MLM has the cloud over it's head and I guess always will.

DECEMBER 23, 2012 9:11 A.M.

cheere to free enterpize wrote:

So Ironic and funny that Ackman is shouting on all medIia stations Ponzi scheme lol Ponzi scheme oh greed its a funny thing look at Bernard Maddof in jail for ever all his or most of his family dead wasn’t he a very prominent philanthropist too and was not Ackman defending J. Ezra Merkin & saying she is a nice person one of Maddofs chief financier and of course SEC will do nothing , people forget Maddof was good friend of SEC chairman Madoff said in the June 17, 2009, interview that SEC Chairman Mary Schapiro was a “dear friend,” and SEC Commissioner Elisse Walter was a “terrific lady” whom he knew “pretty well.’

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